3 reasons why the Volcker Rule can’t fix Wall Street

Commentary: It’s too complicated and regulators only make it worse

DavidWeidner

Bloomberg

SAN FRANCISCO (MarketWatch) — Wall Street’s top five regulators are set to vote Tuesday on the core piece of the 2010 financial overhaul that was passed in the wake of the financial crisis.

Under the much-toiled-over Volcker Rule, we may get regulations in place by 2015. That’s if a lot of things go right: if the votes are there Tuesday, if banks don’t sue the pants off the regulators and hold the law up, if a regulator doesn’t go rogue — the list goes on.

The plan already has been watered down, toughened up and reworked so many times it’s unrecognizable from its original form. According to a draft of the rule seen by The Wall Street Journal, new regulations will be established for banks to discourage risky trading activity.

Even under the best-case scenario, the financial system will get its new safeguards close to eight years after banks began writing off billions of dollars in garbage investments. You know how that chapter ended: more than $1 trillion in taxpayer-funded aid to Wall Street.

Think getting Obamacare going has been tough? If a national health care system took the route the Volcker Rule has, we’d all be dead from complications from hangnails by the time coverage kicked in.

And it’s exactly that sort of bureaucracy, industry lobbying and influence — as well as a lack of regulatory gumption — that leads us to the three main reasons Wall Street will never be fixed.

1. It’s too complicated. Even as the crisis was unfolding, big financial institutions were still creating angles to be worked.

There was interest-rate manipulation — otherwise known as the collusion of banks to set the London interbank offered rate — which, you know, only distorted the returns and charges of more than $50 trillion in credit instruments, corporate and consumer. There was the “London whale” trading scandal at J.P. Morgan Chase & Co.
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which cost that bank and its shareholders more than $7 billion in losses and fines.

There has been, according to regulators, rampant abuse in the energy markets (this a decade after Enron and Dynegy trading scandals). Yes, it’s another list that goes on and on.

If you want to get an idea of Wall Street’s never-ending lust to work around the system and why it is so hard to work around, consider former Federal Reserve Chairman Paul Volcker’s testimony when unveiling the rule for the first time. When asked what “improper trading” might be he answered “I know it when I see it.” Now, the law stretches 70 pages with a “preamble” of definitions and interpretations of close to 900 pages.

2. Too big to fail is still a big problem. This is the beast that Dodd-Frank, the financial reform law, tries to slay. Unfortunately rather than breaking up the beast into manageable pieces as beastmaster and former Citigroup Inc.
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chief Sanford Weill advocated, Dodd-Frank tries to manage the beasts’ behavior. The law itself is an already huge 848 pages. An additional 14,000 pages of supplementary rules have been added. Each page has been pored over and scoured by Wall Street lawyers.

The 1933 Glass-Steagall Act, by contrast, was 37 pages long. And it was far more effective. It simply broke apart commercial banks (the money system) from the brokerages (the investment system). Tuesday, the top six banks, Bank of America Corp.
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, Citigroup, Goldman Sachs Group Inc.
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J.P. Morgan, Morgan Stanley
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and Wells Fargo & Co.
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control assets equal to 65% of U.S. gross domestic product.

And if this still doesn’t seem like a problem, consider what would happen if housing collapsed again, a recession hit, or a conflict with Iran created an international panic. How would Citigroup, where 50% of revenue is generated overseas, fare? How would regulators deal with a run on one of the nation’s three largest banks? Would Dodd-Frank’s “orderly liquidation” rule really work in this scenario, or just make matters worse?

3. Lack of public interest. As most of us are now financially diversified either by choice (IRAs), or force (401(k)s), we tend to get motivated into action depending on the weight of our wallets. Market crash and recession in 2008 to 2010? Occupy Wall Street! Market rally in 2013? Leave the banks alone! And no matter the cycle, most of us depend on banks for that one-of-a-kind commodity: credit and cash. Let’s be blunt. No one was complaining when easy, cheap loans were to be had. But when credit dries up again as it did in 2008, suddenly it’s all the bank’s fault.

It may not be provable in any survey, but I’d bet many of us are terrified about what would happen to the economy, the job market, our ability to get a home loan or big credit-card limit if we really remade our banking system. This underlying fear probably extends to Congress where bank lobbyists — $300 million worth of them annually — have been working the fear angle to maximum benefit.

So it goes with the Volcker Rule and any financial regulation. If bank interests can simply delay and gum up the works, a) they buy themselves time to keep playing by their own rules and b) can wear down regulators and outlast outrage from the public for whatever is the latest mess they’ve caused.

So when regulators vote Tuesday on a unified version of the Volcker Rule, it’s not that it isn’t a good thing. It’s just not a fix. It’s never going to be fixed.

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